By Peter Mastrantuono
If you ask most Americans what their most valuable asset is, they may answer with their home or 401(k) account. Nearly all would be wrong. In fact, for most individuals, including wealthy Americans, their most important asset is themselves, or, more precisely, their future income earning potential.
While protecting against the loss of income due to premature death is essential, fewer Americans appreciate the value of protecting against the loss of income due to disability, even though working Americans are more likely to become disabled before age 65 than they are to die. For instance, a 40 year old has only a 14% chance of dying before age 65, but a 50% greater likelihood of becoming disabled before reaching 65.
In some ways, the need for disability insurance may actually be more pressing for high-income earners.
Three Disability Income Sources
There are three sources of disability income protection. The first is through government programs, but qualifying for benefit payments and benefit limits are such that they are largely of little value to high-income earners.
Another means of coverage is through a worker’s employer. Such coverage may include short-term disability, but that only pays out income for a few weeks or months and/or a long-term disability benefit that may pay out income for multiple years, with some more generous plans paying until the worker turns 65.
Employer-sponsored long-term disability (LTD) plans typically offer payments of up to 65% of a worker’s compensation, up to some prescribed benefit limit, e.g., $10,000 per month.
The third way to protect yourself is through a personal policy that you pay for.
It’s important to note that income paid under an employer LTD plan is generally taxable, while income from an individual policy paid with after-tax dollars is generally tax-free. Because of the tax-free nature of private policy benefits, the needed coverage amount does not have to equal your current, taxable compensation.
Why High-Income Earners Need Personal Disability Income Coverage
High-income earners typically have a higher level of expenses (e.g., private schooling, second homes, etc.) that will need to be met and which government programs and employer LTD plans are inadequate to meet.
In fact, employer plans are of diminishing value as an individual’s career progresses and his or her income increasingly rises above the benefit cap of an employer’s plan. Moreover, compensation may be defined in a way that may not fully reflect a high-income earner’s compensation by potentially excluding bonuses and commissions.
For the elite levels of high-income earners, the combination of an employer benefit and a conventional individual disability policy may not be enough. While, $20,000 a month income benefit may be sufficient for most high-income earners, for some, that amount only begins to cover their monthly expenses.
In such instances, individuals need to consider a High-Limit Disability Insurance policy, which may cover lost income of up to $5 million.
When shopping for a personal disability policy, you should work with an experienced insurance advisor who can help identify policies that include important features and protections, such as a cost-of-living adjustment to benefits so that you can maintain your standard of living over a long period of time, whether disability is defined within the context of “own occupation” or “any occupation,” the waiting period for when benefit payments commence and for how long benefits are paid.
Peter Mastrantuono is a contributing writer to MyPerfectFinancialAdvisor, the premier matchmaker between investors and advisors. Peter worked for over 30 years in the wealth management industry, focusing on retirement planning, investing, asset allocation and financial planning.